Analysis of Compensation for Wrongful Injury in Ireland

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.title[
# Analysis of Compensation for Wrongful Injury in Ireland
]
.subtitle[
## Week 1 (Jun 8 - Jun 14)
]
.author[
### Jiawen Li
]
.date[
### Jun 15, 2023
]

---

# Learning Materials

- Whelan, S. F., & Hally, M. (2022). Compensation for Wrongful Injury in Ireland. In Mortality and Longevity in Ireland. Dublin University Press.

- The Office of the Accountant of the Courts of Justice. (n.d.). Report and Financial Statements for the Year Ended 30 September 2020.

---

# Background

## What is compensation for wrongful injury in Ireland?

- Financial compensation awarded to individuals who have suffered injury or harm due to the negligence or wrongdoing of another party
- Intended to help the injured party recover from their losses and to provide them with financial support for any ongoing medical treatment or care they may require
- Determined based on the specific circumstances of each case
- May include compensation for future loss of earnings, medical expenses, and other costs associated with the injury
- Can be awarded as a lump sum (prevalent) or as periodic payments (PPOs, currently suspended)

---

# Background

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## The Courts and Court Funds
The Courts have a custodial role in relation to funds that are lodged in court pursuant to Court Orders or in compliance with legislative requirements.The categories of funds held by the Courts include, principally:
- (a) **Wards of Court**: the funds of persons taken into Wardship are lodged in Court.
- (b) Minors: financial awards made by the Courts to persons under 18 will have their award lodged in Court until they reach the age of majority. Where a long-term care regime is considered necessary, a minor may be made a Ward of Court.
- (c) Lodgements by Parties to Court Proceedings and Other funds
]

.pull-right[
![courtfund](data:image/png;base64,#w1pic1.jpg)
]
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# Landmark Court Case

## Gill Russell v Health Service Executive

Gill Russell suffered catastrophic injuries at birth at a Hospital in 2006 and requires constant care for the rest of his life.

Liability is admitted. But how much compensation the plaintiff required for the rest of his life and at what rate of return should be applied to that compensation.

The case reconsidered the two different approaches to estimating the real return on a lump sum award. The judgment in this case determined that the **fair value approach** is preferable over the previous **best estimate approach** adopted.

**Before**: Expected rate of return had been set at 3% in the case of Boyne v Dublin Bus in 2003.

**After**: Rate of return to be applied is **1.5%** for aids and appliances expenditures and **1%** for future nursing care and other wage related care.

> In short the original High Court judgement, developed and clarified by the Court of Appeal, states that the discount rate for inflation-linked loss should be determined using the real yield on indexlinked bonds and, for wage-linked loss, this real discount rate should be further reduced.

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# Capitalising Damages For Lump Sum Compensation

## Principles

**Fair Value Approach**:

1. Views compensation as the capitalised value of a freely traded asset that replicates the future loss.

2. Uses a portfolio of index-linked bonds to closely match the future loss, with the market value of this portfolio considered the compensatory lump sum.

**Best Estimate Approach**:

1. Estimates the expected real return on an investment portfolio based on the plaintiff's risk appetite.

2. Assumes that the plaintiff can tolerate investment risk to some extent and reduces the lump sum determined by the fair value approach by the extent of investment risk to be borne by the plaintiff.

---

# Capitalising Damages For Lump Sum Compensation

## Example

> Say the court accepts, on the basis of evidence presented, that the plaintiff
has suffered the following monetary loss in the future under different headings
(all values in present day terms)

| Headings                                                    | Cost (Multiplicand) |
|-------------------------------------------------------------|---------------------|
| Cost of Employing a caregiver from now for life             | €1,000 per week     |
| Loss of Earning from Age 21 to Age 68                       | €500 net per week   |
| Loss of Pension from age 68 for remainder of life           | €250 net per week   |
| Cost of Aids and Appliances (e.g. wheelchair, hoists, car adaptations) from now for life | €100 per week for life |

---

# Capitalising Damages For Lump Sum Compensation

## Example

.right-column[
| Headings                                                                    | multiplier       |
|-----------------------------------------------------------------------------|------------------|
| Capitalised Cost of Employing a caregiver for €1 per week from now for life | 2,691            |
| Capitalised Value of Loss of Earning of €1 per week from Age 21 to Age 68   | 1,718            |
| Capitalised Value Loss of Pension for €1 per week from age 68               | 430              |
| Capitalised Cost of Aids and of €1 per week from now for life               | 2,304            |

```r
# life_table: any life table with age and mortality q_x
# i is set to be 1% and 1.5% respectively
temporary_life_annuity <- function(age, n, m, i, life_table) {
  px <- 1-life_table$qx
  kpx <- cumprod(px[(age+1):(age+n-1)])
  discount_factors <- (1+i) ^ - (1:(length(kpx)))
  sum(discount_factors * kpx) - (m-1) / (2*m) * (1-v^n*kpx)
}
```
]

.left-column[
Assumptions:
- Probability of future payments (including mortality rates).
- Increase in net loss over time (inflation, salary increases, promotions).
- Discount rate for future payments.
- Taxation rates for income and capital gains.
- Other factors.
]

---

# Capitalising Damages For Lump Sum Compensation

## Example

Lump Sum to Compensate for Future Monetary Loss:

| Item                                                       | Calculation    | Amount       |
|------------------------------------------------------------|---------------:|-------------:|
| Capitalised Cost of Employing caregiver from now for life  | €1,000 × 2,691 | €2,691,000   |
| Capitalised Value of Loss of Earning from Age 21 to Age 68 | €500 × 1,718   | €859,000     |
| Capitalised Value Loss of Pension from age 68              | €250 × 430     | €107,500     |
| Capitalised Cost of Aids from now for life                 | €100 × 2,304   | €230,400     |
| Lump Sum to Compensate for Future Monetary Loss            |                |**€3,887,900**|

---

# Fair Value Approach in Practice

**Index-linked gilts (ILGS)** issued by the State or other organizations with good credit ratings can provide a future inflation-linked stream of payments.

#### Problems and Solutions:

> There are essentially no index-linked bonds linked to future inflation in Ireland.

- France, Germany, and Italy have issued such bonds with inflation linked to Eurozone inflation. Irish plaintiffs can consider investing in these index-linked bonds with no currency risk.

- Studies suggest that inflation rates do not differ significantly over the long term in regions with the same currency.

> Index-linked bonds in countries that issue them do not span the maturity range needed to match the plaintiff’s loss which might continue for several decades.

- Step 1: Invest the portion of the lump sum deemed to meet the loss over the years beyond the present time in a 2047 dated French index-linked bond at the current real yield.

- Step 2: Sell these index-linked stock holdings and use the proceeds to buy longer-dated index-linked stock when longer-dated bonds are issued.

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# Court Fund Investment Strategy

.pull-left[
![funds](data:image/png;base64,#w1tab2.jpg)
]

.pull-right[

![mix](data:image/png;base64,#w1tab5.jpg)
- State Street Global Advisors (SSGA) serves as the investment manager of the court fund.
- Due to the impact of COVID-19 and negative interest rates by the European Central Bank, the return rate has experienced significant fluctuations.
]

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# Review: Assumptions Using in Capitalising Damages

After understanding the context and calculation methods, we should contemplate how to adjust the assumptions to better reflect real-life scenarios.

### Review Wage Discount Rate

- Wages will increase faster than inflation over the long-term future, generally by between 1 percent and 2 percent per annum.
- Assuming real wages increase at +1.5 percent per annum on average over the long-term future, then the discount rate used in capitalising wage-linked loss in Irish courts should be –2.5 percent.

### Choose Cohort Mortality

- Cohort mortality takes into account projected mortality rates based on future changes, providing a more accurate estimation of survival probabilities. 
- It is typically greater than period life expectancy as mortality rates are forecasted to continue declining in the future. Current method potentially results in underestimating the impact of mortality improvements on compensation calculations.

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# Review: Assumptions Using in Capitalising Damages

### Use a "Prediction Interval" method rather than the "Expectation" method

.pull-left[
![mortality](data:image/png;base64,#w1fig4.jpg)

]

.pull-right[
![table](data:image/png;base64,#w1tab4.jpg)
- Due to the negative skewness of mortality, the median life expectancy tends to be lower than the mean. i.e there is a probability greater than 50 percent that the individual will outlive the average life expectancy. 
- This means that relying solely on life expectancies or life annuities may result in undercompensation for the individual's future needs.
- A further increase to the lump sum is required to provide a higher level of confidence and adequate compensation for potential longevity.
]